What should the smart people do regarding the financial system?
This is a burning question that everyone has in their minds. Is bailout good? Jim Rogers and Austrians alike will say no. I will throw you the word unknowledge. Majority of the people (I guess) will say that if we don't bail them out, we will suffer badly (whatever).
So I was talking to this teacher today and I explained to him about my forest fire analogy. He was mentioning to me that actually people do try to stop forest fires. They will burn down a ring of trees that is further away from the main fire. This isolate the inner burning trees and also prevent them from spreading to the good trees outside. Perfect sense!
I thought that this was pretty awesome. Two things that we can draw here.
1. Identify the end of the bulk of dry leaves.
2. Burn them first.
But by doing this, you need to hit yourself at the back of your head and say: you can't stop the fire that is burning now. This has always been my line of thought. But I guess it is easy to say but difficult to believe in.
Identifying the end of the whole bulk mess is also another difficult task. I mean, what are the good banks/financial institutions left? I really don't know. Hopefully someone can enlighten me. Maybe Lazard Frères & Co will rise to the top of the industry again.
Burning down a ring of weaker trees is also another tricky question. How to burn banks? I suppose you have to let some go bankrupt.
But ultimately, to fight against a super huge fire, you have to use fire. I know this sounds freaking fuzzy, but it's pretty cool isn't it? Common sense tells you to use water but during a super huge fire, where do you find the huge supply of water?
Desperate times call for desperate measures. Use fire against fire. I like it.
Wednesday, January 28, 2009
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2 comments:
Shouldn't the market decide what the weak trees (er banks) are? One of the basic rules of trading is this - you only risk a certain percentage of your trading capital at any one point in time. For some this is 1%, for others it can be as high as 10%. Some of the banks went too deep into the mortgage market - and some went far to deep into the sub-prime mortgage market, a profitable but very risky setup. When a trader risks 50% of their account on a trade and the market moves against them that's it, they are out unless they review and re-capitalize. I don't think investment houses should be treated any differently. It may be painful but in the long run, I'm sure it will be a good thing. Credit and capital may freeze for a time, but that is the market telling us something.
Call the fire department.
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